Central bank cuts rates for 3rd time in 6 months to boost economy

Customers walk past a display of shoes at a shopping mall in Beijing

For the third time in six months, China’s central bank is cutting interest rates to spur the country’s sluggish economy by giving state-owned financial institutes more flexibility in setting rates.
Citing “downward economic pressures,” the People’s Bank of China said yesterday that it would cut the rate on a one-year loan by commercial banks by 0.25 percentage point to 5.1 percent. The interest rate paid on a one-year deposit was lowered by 0.25 point to 2.25 percent.
The rate cut reflects the Communist leadership’s growing urgency about reversing a deepening slump that threatens to cause a politically dangerous spike in unemployment.
Policy makers took the step after reports in recent days showed inflation remains subdued and exports and imports both slid in April – underscoring the economy’s continuing struggle to match Premier Li Keqiang’s 2015 growth target of about 7 percent. With capital flowing abroad and local governments embroiled in a complex debt cleanup, officials are turning to cheaper borrowing costs to help bolster lending.
“Economic growth is weaker than expected, and inflation is low,” said Xu Gao, the chief economist with Everbright Securities Co. in Beijing. “In fact, the rate cut is very mild with just a quarter of a percentage point, and the PBOC may have to cut interest rates again quite soon.”
In a gathering of the Communist Party’s Politburo April 30, President Xi Jinping and his colleagues vowed to step up targeted measures to counter downward pressure on the economy. One area that has benefited from stimulus is China’s stock market, with the Shanghai Composite Index soaring since early March.
The leadership is juggling the need to keep growth from slipping too far with plans to press ahead with structural reforms to the economy reducing the role of investment and enhancing that of private companies, the services sector and consumer spending.
One step officials have been reluctant to take is letting the yuan depreciate along with the currencies of other emerging markets in the past year, as the U.S. Federal Reserve prepares to raise interest rates. While a cheaper exchange rate may help export competitiveness, one concern is that it could unwind long-term bets on yuan gains and spur further capital flight.
China is battling a property slump, excess industrial capacity, local-government debt and capital outflows, with the economy expanding at the slowest pace since 2009 in the first quarter. Consumer prices in April rose at half the pace the government is targeting for 2015, data showed Saturday.
The latest rate reduction adds to its own easing and that of at least 30 countries that have loosened monetary policy this year as lower commodity prices give room to stimulate.
The cuts are expected to reduce financial costs for state companies and are a signal to state-owned banks to boost lending. AP/Bloomberg